Landlord and tenant — Whether disclaimer of lease by liquidator of assignee company discharges liability of earlier assignee and surety for arrears of rent
By a lease
dated October 20 1983 the first defendant was granted a 20-year term of
premises from September 12 1983 at an initial yearly rent of £13,626 subject to
review. In 1987 the lease was assigned to the second defendant pursuant to a
licence to assign containing a covenant by the second defendant to pay the rent
and perform the covenants during the remainder of the term; the obligations of
the second defendant were guaranteed by the third defendant by way of a surety
covenant. In 1989 the second defendant assigned the lease to P Ltd and in 1990
the rent was reviewed to £37,500 pa. Following P Ltd’s liquidation, the
liquidator disclaimed the lease on December 8 1992 pursuant to section 178 of
the Insolvency Act 1986. The plaintiff claimed arrears of rent from the
defendants and summary judgment was entered against all the defendants. The
second and third defendants appealed, contending that the disclaimer operated
to determine their liability; the disclaimer of a lease determines the
liability of the original tenant and a covenant by an intermediate assignee in
the form entered into by the second defendant was indistinguishable from that
of the original tenant.
original tenant, disclaimer of the lease determines the lease and discharges
the liability of the tenant and of any surety: see Stacey v Hill [1901]
1 KB 660. Where a lease is vested in an assignee, disclaimer of the lease has
no effect on the continuing liability of the original tenant or his surety: see
Hill v East & West India Dock Co (1884) 9 App Cas 448 as applied
in Warnford Investments Ltd v Duckworth [1979] Ch 127. The
introduction of what is now subsection (4)(b) of section 178 of the Insolvency
Act 1986 by the Bankruptcy Act 1883 has not affected the decision of the House
of Lords in the Hill case. Part of the reasoning of Sir Robert Megarry
V-C in Warnford Investments Ltd v Duckworth rejected.
The following
cases are referred to in this report.
Hill v East & West India Dock Co (1884) 9 App Cas 448
Stacey v Hill [1901] 1 KB 660
Warnford
Investments Ltd v Duckworth [1979] Ch 127;
[1978] 2 WLR 741; [1978] 2 All ER 517; (1977) 36 P&CR 295
WH
Smith Ltd v Wyndham Investments Ltd unreported,
May 18 1994
This was an
appeal by the second and third defendants, CIT Developments Ltd and Patrick
John Whitten, from a decision of Mr Simon Goldblatt QC, sitting as a deputy
judge of the Queen’s Bench Division, who on October 14 1993 gave judgment to
the plaintiff, Hindcastle Ltd, under RSC Ord 14.
David Oliver
QC and Carolyn Walton (instructed by Stallards) appeared for the appellants;
Jonathan Arkush (instructed by Chethams) represented the respondent.
Giving
judgment at the invitation of Sir Stephen Brown P, MILLETT LJ said: This
is an appeal with the leave of the judge by the second and third defendants
from two orders both dated October 14 1993 of Mr Simon Goldblatt QC, sitting as
a deputy judge of the Queen’s Bench Division, whereby he gave summary judgment
under RSC Ord 14 for arrears of rent due under a lease after the lessee had
gone into insolvent liquidation and the liquidator had disclaimed the lease.
The second
defendant is an intermediate assignee of the lease which entered into a direct
contractual relationship with the lessor. The third defendant is a surety which
guaranteed the contractual obligations of the second defendant. The first
defendant is the original lessee under the lease. The deputy judge gave
judgment against all three defendants, but the first defendant, which I
understand is now also in liquidation, has not appealed.
The question
for decision is whether the disclaimer of a lease under section 178 of the
Insolvency Act 1986 by the liquidator of a company, which has taken an
assignment of the lease, operates to determine the liability of the original
lessee and any surety for the original lessee, for the position of an
intermediate assignee of the lease which has entered into direct contractual
relationship with the lessor is indistinguishable from that of the original
lessee. Although in form the appeal is an appeal from the decision of Mr Simon Goldblatt
QC, it is, in reality, an appeal 15 years out of time from a decision of Sir
Robert Megarry V-C in 1979 and it has been argued by the same counsel who
appeared for the unsuccessful party in that case.
The lease was
granted on October 20 1983 for a term of 20 years from September 12 1983 at an
initial rent of £13,626 pa with periodic upwards-only rent reviews. It was made
between the respondent as lessor and the first defendant as original lessee. It
was not assignable except with the consent of the lessor. In 1987 it was
assigned to the second defendant pursuant to a licence to assign which
contained a covenant on the part of the second defendant with the lessor to pay
the rent and observe and perform the covenants in the lease during the
remainder of the term thereby granted. The third defendant joined in the
licence to assign in order to guarantee the performance of the obligations
thereby undertaken by the second defendant. The obligations of the third
defendant as surety were limited to expire after the end of 10 years from the
date of the lease.
In 1989 the
second defendant assigned the lease to Prest Ltd (‘the company’). The
assignment was made with the lessor’s consent. In 1990 the company and the
lessor agreed that the rent payable under the lease in accordance with the rent
review provisions should thenceforth be £37,500 pa. None of the defendants took
any part in the negotiations which led to the revised rent. On October 31 1992
the company went into creditors’ voluntary liquidation. On December 8 1992 the
liquidator gave notice of disclaimer of the lease pursuant to section 178 of
the Insolvency Act 1986. No one has applied for a vesting order under section
181 of the Act and the time-limit for doing so prescribed by the Insolvency
Rules has now expired, though
claiming arrears of rent in respect of different rental periods. The writs were
issued on January 28 1993 and July 22 1993 respectively and summary judgment in
both actions was entered against all the defendants following Mr Goldblatt’s
judgment in November 1993.
The effect of
a disclaimer by the liquidator of an insolvent company is laid down by section
178 of the Insolvency Act 1986 and in particular by subsections (4) and (6)
thereof. Subsection (4) provides:
A disclaimer
under this section —
(a) operates so as to determine, as from the date
of the disclaimer, the rights, interests and liabilities of the company in or
in respect of the property disclaimed; but
(b) does not, except so far as is necessary for
the purpose of releasing the company from any liability, affect the rights or
liabilities of any other person.
Subsection (6)
provides:
Any person
sustaining loss or damage in consequence of the operation of a disclaimer under
this section is deemed a creditor of the company to the extent of the loss or
damage and accordingly may prove for the loss or damage in the winding up.
Provisions in
identical terms are contained in section 315 of the Insolvency Act 1986 in
relation to disclaimer by the trustee in bankruptcy of an individual bankrupt.
Provisions to
the like effect have been contained in every Companies Act since the right to
disclaim onerous property was first extended from personal to corporate
insolvency by the Companies Act 1929 and in every Bankruptcy Act since the
Bankruptcy Act 1883. The Insolvency Act 1986 introduced two changes primarily
of a procedural character, though having some substantive effect. Before the
Act the liquidator of an insolvent company needed the leave of the court to
disclaim in all cases, whereas a trustee in bankruptcy did not need such leave
in most cases and in particular did not need leave to disclaim a lease unless
the bankrupt had sublet the premises or mortgaged the lease and the lessor,
sublessee or mortgagee had objected to the disclaimer after being given notice
thereof. The changes introduced by the 1986 Act brought the law and practice of
disclaimer in corporate insolvency into line with that prevailing in personal bankruptcy.
They were not without substantive effect, however, for the court had normally
refused leave to disclaim where this would prejudice the lessor by discharging
a surety from liability. Under the 1986 Act, however, the lessor has no
opportunity to object to the disclaimer taking effect.
Mr David
Oliver QC, who appeared for the second and third defendants, acknowledged that
the changes introduced by the Insolvency Act 1986 did not affect the
consequences of a disclaimer, which are laid down by section 178(4) and (6) in
substantially the same terms as the corresponding provisions of the Bankruptcy
Acts of 1883 and 1914. For ease of exposition I shall, throughout the rest of
this judgment, refer to the relevant provisions of the earlier legislation by the
numbers of the corresponding provisions in the Insolvency Act 1986, that is to
say, subsections (4) or (6).
The
consequences of disclaimer of leasehold property have been considered by the
courts on a number of occasions. The leading authorities, which consist of one
decision of the House of Lords on the effect of the Bankruptcy Act 1869 and one
decision of this court on the effect of the Bankruptcy Act 1883, established
that there is a clear distinction between the case where the lease was still
vested in the original lessee immediately before the disclaimer (which is not
the present case); and the case where it is vested in an assignee of the
original lessee (which is). The burden of Mr Oliver’s submissions was that
there is no relevant distinction to be drawn between the position of a surety
for the bankrupt original lessee and the original lessee with an unbroken chain
of indemnity from the bankrupt assignee. Each of them is liable to the lessor
and is entitled to be indemnified by the bankrupt’s estate. I shall deal in
turn with the two situations as they appear from the relevant authorities.
1. Lease vested in the
original lessee
Disclaimer by
the trustee in bankruptcy of the lessee determines the lease and the lessee’s
obligations thereunder, with the result that the liability of any surety for
the lessee is necessarily discharged. This was decided in Stacey v Hill
[1901] 1 KB 660, a decision of this court. Two grounds for the decision can
be detected:
(i) No other person being interested in the lease,
the determination of the lessee’s rights and liabilities thereunder — including
his right to possession — has the effect of determining the lease altogether
and accelerating the reversion. The effect of determining the liability of the
lessee is to discharge the surety, for the secondary liability of a surety
cannot survive the extinction of the primary guaranteed debt.
(ii) Subsection (4)(b) does not have the
effect of preserving the liability of the surety because the existence of the
surety’s right of indemnity by the principal debtor makes it necessary to
release the surety if the bankrupt’s estate is to be released from liability.
Two points may
be noticed. The first and main ground for the decision, in which all three lord
justices concurred, was that the determination of the lessee’s rights and
obligations had the effect of determining the lease. The lessee’s right to
possession being determined and there being no one else with a similar right,
there was no obstacle to the lessor’s resumption of possession with a view to
reletting the property. Strictly speaking, it was unnecessary to decide that
the lease was determined or the reversion accelerated; it was sufficient for
the decision that the liabilities of the lessee under the lease had been determined.
The second
ground for the decision, to which only two of the lord justices subscribed, is
not fully explained in the judgments and is not so straightforward as it
appears at first sight. I shall have to return to this aspect of the case
later.
2. Where the lease is vested
in an assignee
Prior to the
Bankruptcy Act 1883 a disclaimer by the trustee in bankruptcy of an assignee of
the lease had no effect on the continuing liability of the original lessee or
his surety. This was decided by the House of Lords in Hill v East
& West India Dock Co (1884) 9 App Cas 448. That case was decided under
the Bankruptcy Act 1869, the relevant provisions of which were in very
different terms from those introduced by the Bankruptcy Act 1883 and which in
particular did not include any provision corresponding to subsection (4)(b).
The House of Lords held that the determination of the rights and liabilities of
the assignee, which took effect by way of a deemed surrender of the lease,
operated only as between the lessor and the bankrupt assignee; so far as the
original lessee was concerned, the lease continued to subsist (as did his
liability) unless and until the lessor resumed actual possession and brought
the lease to an end for all purposes.
Two points may
be made about that decision.
(1) Mr Oliver submitted that the concept of a
lease continuing to exist but having no owner is not a particularly easy one to
grasp; nor is it easy to understand what obstacle there is to the lessor’s
resumption of possession and reletting the property, seeing that the right to
possession of the bankrupt assignee has been determined and that he is the only
person entitled to possession as against the lessor. These difficulties are
inherent in the decision itself; they do not derive from the potential
reactivation of the lease by the making of a vesting order, since there was no
power to make such an order prior to the Bankruptcy Act 1883. Both suggested
difficulties disappear, however, once it is recognised that the question is not
whether the lease actually exists or not, but whether it is to be deemed or
treated as continuing to exist. The result of the decision in Hill v East
& West India Dock Co is that, as between the lessor and the bankrupt
assignee, the lease is deemed to have been surrendered; as between the
lessor and the original lessee and his surety, it is not deemed to have been
surrendered. In the real world a lease must either exist or not. In the world
of statutory hypothesis, however, there is no such requirement.
(2) The basis of the decision in Hill v East
& West India Dock Co is that the liability of the original lessee is a
primary and direct liability and is not dependent on the continued liability of
the assignee. There
the one does not discharge the other. In Stacey v Hill by
contrast, there was only one obligation, namely that of the lessee, though two
different parties were liable in respect of it; and the statutory determination
of that obligation necessarily discharged the liability of both of them.
The question,
therefore, is what difference, if any, to the liability of the original lessee
and any surety for him resulted from the introduction in 1883 of subsection
(4)(b); for we are bound in this court by the decision in Hill v East
& West India Dock Co to hold that an original lessee is not discharged
from his liability to the lessor by reason of the disclaimer of the lease by
the liquidator of an assignee ‘except so far as is necessary for the purpose of
releasing the company [that is to say, the insolvent assignee] from any
liability’.
This question
was considered by Sir Robert Megarry V-C in a characteristically clear and
comprehensive judgment in Warnford Investments Ltd v Duckworth [1979]
Ch 127. He held that the introduction of subsection (4)(b) by the
Bankruptcy Act 1883 made no difference. Accordingly, he applied Hill v East
& West India Dock Co and distinguished Stacey v Hill. He
pointed out that the situations dealt with by the two cases were entirely
different. In the one case the lease itself was determined and with it the
liability of the bankrupt; and the guaranteed liability having been brought to
an end the surety was necessarily discharged. In the other, the liability of
the original lessee was primary and direct and was not dependent on any
continued liability on the part of the bankrupt. The Vice-Chancellor dealt with
the argument that the liability of the original lessee was determined (or more
accurately not preserved) by subsection (4)(b) by saying that the
bankrupt’s estate was not released from liability in any event: any loss
sustained by reason of the disclaimer was susceptible of proof under subsection
(6) (a provision which has been in every Bankruptcy Act since 1869). The only
question was whether the proof should be lodged by the lessor or by the
original lessee. If the original lessee was discharged from liability, the
proof would be lodged by the lessor; if not, it would be lodged by the original
lessee, relying on the chain of indemnity. In either case, the bankrupt’s estate
would not be released from liability. Since the discharge of the original
lessee did not in fact lead to the release of the bankrupt estate, it could not
be necessary in order to secure its release.
If that
reasoning is correct, then, in my judgment, the second ground of the decision
in Stacey v Hill cannot be supported; for there is no relevant
distinction to be drawn between the position of the original lessee and that of
a surety for the bankrupt assignee, each being liable to the lessor and having
a claim for indemnity against the bankrupt estate. Either the determination of
the liability to the lessor results in the release of the bankrupt estate or it
does not and, if it does not (whether because of subsection (6) or otherwise),
then the discharge of the person entitled to be indemnified is not necessary
for the purpose of securing the release of the bankrupt estate from liability.
But, in my
judgment, this part of the reasoning of the Vice-Chancellor is untenable. It is
necessary to distinguish between two quite different liabilities of the
bankrupt estate. There is, first, the liability which is put an end to by the
disclaimer; in the present case, for example, the liability to pay the rent due
under the lease. There is, second, the statutory liability under subsection (6)
which replaces it, that is to say, the liability to compensate any person who
has sustained loss or damage in consequence of the disclaimer. These
liabilities may or may not be identical in amount, but they are different and
distinct liabilities, the effect of a disclaimer being to extinguish the one
and to replace it by the other. In my judgment, when subsection (4)(b)
speaks of something being ‘necessary for the purpose of releasing the company
from any liability’, the words ‘any liability’ refer to a liability of the
first kind and not the second. There are two reasons for this. In the first
place, the effect of the disclaimer under subsection (4) must be determined as
an anterior question before the identification of the party sustaining loss as
a result and the quantification of his loss can be undertaken for the purposes
of proof under subsection (6). In the second place, the bankrupt’s estate can
never be released from its potential liability under subsection (6). In my
judgment, therefore, subsection (4)(b) means:
necessary for
the purpose of releasing the company from any such liability as aforesaid
that is to say,
a liability in or respect of the property disclaimed and capable of being
determined by subsection (4)(a).
The rejection
of this part of the reasoning of the Vice-Chancellor, however, also disposes of
Mr Oliver’s main argument, which is that subsection (4) should be given a
purposive construction; that its purpose is to release the bankrupt estate from
liability to the greatest extent possible; that this means giving subsection
(4) that effect which would lead to the smallest possible claim under
subsection (6); and that this in turn means extinguishing the liability of the
original lessee and substituting a claim by the lessor, who would inevitably
have a smaller claim than the original lessee, since the lessor, being able to
relet the premises, would have to give credit for the current rental value of
the premises, whereas the original lessee would have nothing for which he could
be required to give credit. The whole elaborate argument breaks down, however,
once it is recognised that the amount of the loss sustained by reason of the
disclaimer and provable under subsection (6) cannot be considered until the effect
of the disclaimer under subsection (4) has first been determined.
It follows, in
my judgment (and to this extent I disagree with the judgment of Sir Robert
Megarry V-C), that the case of the original lessee with an unbroken chain of
indemnity cannot be distinguished from that of the surety of the bankrupt
lessee by praying in aid the existence of subsection (6). The question,
however, remains: is it necessary to extinguish the liability of the original
lessee to the lessor in order to release the liability of the bankrupt assignee
to indemnify him? The question has only
to be asked to be answered in the negative. It cannot be necessary to
extinguish the liability of the original lessee in order to release the estate
of the bankrupt: it is sufficient to extinguish the liability of the bankrupt
assignee to indemnify the original lessee. Moreover, the extinction of the
liability of the bankrupt estate to indemnify the original lessee is, in my
judgment, the plain effect of the subsection. Subsection (4)(a) determines
all the liabilities of the bankrupt assignee in respect of the disclaimed
property. These are not restricted to liabilities owed to the lessor. They
include not only the liability to pay the rent to the lessor but also the
liability to indemnify the original lessee in respect of rent payable to the
lessor: both, in my judgment, are equally ‘liabilities in respect of the
disclaimed property’. In order to release the estate of the bankrupt assignee
from its liability to indemnify the original lessee, however, it is necessary
to extinguish the right of the original lessee to be indemnified; what
subsection (4)(b) does, however, is to make it clear that the liability
of a bankrupt assignee is determined notwithstanding its effect on the right of
the original lessee to an indemnity against his liability.
This was the
solution adopted by Judge Paul Baker QC in WH Smith Ltd v Wyndham
Investments Ltd (unreported) delivered on May 18 1994. He said (and I read
from p6 of the transcript of his judgment):
. . . I see
no difficulty in abrogating the right of the original lessee to claim an
indemnity from the assignee without any necessity to abrogate the obligation of
the original lessee to pay the lessor. To compensate for the loss of the right
to be indemnified against future rent, the original lessee can prove for any
loss or injury under section 178(6). I may add, with all respect, that I do not
see the necessity for any equation between the lessee’s claim for injury and
that of the lessor as expounded by the Vice-Chancellor in the passage set out
above. The position as I see it is that the liability of the assignee to
indemnify the original lessee against future payments of rent is removed and a
right to assess the loss and prove for it once and for all is substituted
without regard to claims for loss or injury from any other party.
Mr Oliver’s
response to this solution was to submit that we are precluded from adopting it
by the decision of this court in Stacey v
it and we cannot take refuge in the fact that the second ground for the
decision has not won universal acceptance, or that the first ground was
sufficient for the decision, or that the second ground is not fully explained.
Mr Oliver submitted that the solution which I have suggested (and which was
adopted by Judge Paul Baker) was equally open to the court in Stacey v Hill;
and that since that court undoubtedly decided that it was necessary to
discharge the surety in order to release the bankrupt lessee, it must be taken
to have decided that it was not sufficient (or appropriate or possible) to
leave the surety’s obligation unaffected and extinguish his right to indemnity;
and that the same must necessarily apply to the case of an original lessee.
As a strict
matter of stare decisis, that submission is not acceptable. We are bound
by what the court in Stacey v Hill actually decided, but not by
any conclusion which can be logically deduced from what was decided but which
was neither argued nor considered. But in any case I do not accept the
submission. The right of the surety to be indemnified by the principal debtor,
although arising from contract express or implied, is inherent in the
relationship between them. It is co-extensive with and arises eo instanti as
his liability. The two may be regarded as inseparable; or, as is sometimes
said, as two sides of the same coin. It would, in my judgment, require very
clear statutory language to deprive a statutory surety of his right to
indemnity while leaving his liability unimpaired. No such language is to be
found in subsection (4)(b) and it is not surprising that the possibility
of extinguishing the surety’s right to indemnity while leaving him exposed to
liability did not occur to any member of the court, except possibly Romer LJ
who rejected it. No such inhibitions need constrain the court when considering
the position of the original lessee. His obligation arises when he takes the
lease; it continues after assignment. If he is prudent, therefore, he takes a
covenant of indemnity from his assignee when he assigns the lease. But his
right to indemnity is quite separate from his obligation. The two arise at
different times and by virtue of different instruments; and the existence of
the obligation in no sense imports the right. Like Judge Paul Baker QC, I see
no objection to abrogating the right of the original lessee to an indemnity
from the assignee without any necessity to abrogate the obligation of the
original lessee to the lessor; and, in my judgment, we are not precluded by the
decision in Stacey v Hill from deciding that that is the effect
of subsection (4).
In an
alternative and subordinate submission, Mr Oliver submitted that the liability
of the second and third defendants extended only to the initial rent reserved
by the lease and not to the increased rent agreed between the company and the
lessor in accordance with the provisions of the rent review clause. That
agreement was reached without reference to the second or third defendants. The
question depends on the true construction of the covenants entered into by the
second and third defendants in the licence to assign.
The second
defendant covenanted with the lessor:
that as from
the date when the Lessee’s estate and interest in the Lease shall be assigned
to the assignee pursuant to the Licence hereinbefore contained and thenceforth
during the residue of the term created by the Lease the Assignee will pay the
rents thereby reserved . . .
That takes one
back to the lease in order to ascertain what was the amount of the rent
reserved thereby during the relevant rental period. That takes one to clause 5
of the lease, which (so far as material) provided:
5. IT IS
HEREBY FURTHER AGREED AND DECLARED as follows:–
The yearly
rents reserved by this Lease are those stated in or ascertained in accordance
with this Clause . . .
(2) The yearly rent shall be:–
(a) until the first review date the yearly rent
of thirteen thousand six hundred and twenty six pounds (13,626) and
(b) during each successive review period a yearly
rent equal to the yearly rent previously payable hereunder or such revised
yearly rent as may be ascertained as herein provided whichever be the greater
and
(3) Such revised yearly rent for any review
period may be agreed at any time between the Lessor and the Lessee or (in the
absence of agreement) determined . . .
(I should add
that the word ‘lessee’ was defined as including the original lessee and its
successors to title.)
Accordingly,
on the plain construction of the language of the lease, the rent reserved by
the lease after the first review date was the rent agreed between the lessor
and the then lessee in accordance with clause 5(2)(b) and (3) of the lease.
Indeed, the argument that the only rent which the second defendant has
covenanted to pay which the third defendant was covenanted to guarantee is
£13,626 is completely untenable since that rent was reserved by the lease until
the first review date and not afterwards.
In a powerful
argument, Mr Oliver submitted that the time has come to re-examine the position
of the original lessee. The continuing liability of the original lessee after
assignment of the lease and the possible operation of a rent review clause has
been the subject of a report by the Law Commission and may well merit
consideration by Parliament. We are not concerned with that, but only with a
narrower question: the continuing liability of the original lessee after the
disclaimer of the lease by the liquidator of his assignee. In my judgment, his
liability was established by Hill v East & West India Dock Co case,
a decision of the House of Lords which is binding on us and the introduction of
subsection (4)(b) by the Bankruptcy Act 1883 has not affected it.
Accordingly, for my part, I would dismiss this appeal.
SIR STEPHEN
BROWN P and ROSE LJ agreed and did not add
anything.
